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UNITED STATES v. 105

August 11, 1993

United States of America, Plaintiff,
v.
105,800 Shares of Common Stock of FirstRock Bancorp, Inc., Defendant. United States of America, Plaintiff, v. 122,942 Shares of Common Stock of FirstRock Bancorp, Inc., Defendant. United States of America, Plaintiff, v. 49,032 Shares of Common Stock of FirstRock Bancorp, Inc., Defendant.



The opinion of the court was delivered by: PHILIP G. REINHARD

 INTRODUCTION

 James Leichter, James Shaw, Bradley Frericks, Zvi Fishbane, Sheila Powsner, Joel Pogolowitz, Robert Rubinstein, Dolores Jugo, Nathen Schwitzer, Susan B. Kirschner, Dennis Bragelman, Gus Boosalis, the Trustee for Robinson Engineering, Ltd. Profit Sharing Trust (Robinson Engineering) and Elite have filed motions to dismiss or for summary judgment of the government's forfeiture complaint and to vacate a prior ex parte order dated October 4, 1992, authorizing the immediate seizure of their FirstRock stock. The government has also filed a motion to strike claims and for entry of a default judgment against nonclaimants. Claimant Walter J. Luscy has filed a certification in opposition to the government's motion to strike.

 This court has jurisdiction over this dispute pursuant to 28 U.S.C. §§ 1345, 1355 (See Order Dated June 14, 1993). For purposes of this order only, the court will consolidate the three civil forfeiture actions and will address all pending motions to dismiss, motions for summary judgment, the government's motion to strike and its motion for entry of default judgment. The court's decision on the motion for default judgment against nonclaimants is contained in a separate consolidated order.

 FACTS

 First Federal Savings and Loan Association of Rockford, Illinois ("Association") operated as a federally chartered mutual savings association owned collectively by all its depositors until 1992. Beginning in May 1992, the Association started converting to First Federal, owned directly by FirstRock and indirectly by FirstRock's shareholders.

 The Office of Thrift Supervision (OTS) monitors the conversion of a mutual savings association to a capital stock association in compliance with conversion regulations. See 12 C.F.R. § 563b (1993). The purpose of the conversion regulations is to provide an opportunity for existing depositors to continue ownership in the newly formed institution. Thus, pursuant to the regulations, existing depositors having accounts opened at a converting association on a specified date must have the right to purchase stock in the new institution before the stock is offered to the general public. See generally 12 C.F.R. § 563b.3(c) (1993). According to the regulations, no person shall transfer, or enter an agreement to transfer, the legal or beneficial ownership of conversion subscription rights, or the underlying securities to the account of another. See 12 C.F.R. § 563b.3 (1993).

 The government alleges that First Federal allowed eligible Association depositors to purchase FirstRock stock before making this offer to the general public in accordance with the conversion regulations. Additionally, First Federal tried to prevent speculators from wrongfully acquiring stock during the conversion. For example, the prospectus accompanying all stock order forms distributed by FirstRock included several warnings:

 
Restrictions on Transfer of Subscription Rights and Shares
 
Prior to the completion of the Conversion, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Each person exercising subscription rights will be required to certify that a purchase of Common Stock is solely for the purchaser's own account and that there is no agreement or understanding regarding the sale or transfer of such shares. See "The Conversion-Restrictions on Transfer of Subscription Rights and Shares.
 
The Company and the Association will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights.

 * * *

 
 
Restrictions on Transfer of Subscription Rights and Shares
 
Prior to the completion of the Conversion, the OTS conversion regulations prohibit any person with subscription rights, including the Employee Plans, Eligible Account Holders and Other Members of the Association, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Such rights may be exercised only by the person to whom they are granted and only for his account. Each person exercising such subscription rights will be required to certify that he is purchasing shares solely for his own account and that he has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase such subscription rights or shares of Common Stock prior to the completion of the Conversion.
 
The Association and the Company will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights.

 Additionally, the subscription offering stock order form FirstRock provided to prospective purchasers contained a similar warning. (See Compl., Exh. B). Moreover, the stock order form which eligible depositors were required to sign stated, "Under penalty of perjury, I certify . . . that I am purchasing shares solely for my own account and that there is no agreement or understanding regarding the sale or transfer of such shares, or my right to subscribe for shares herewith." (See Compl., Exh. B).

 BACKGROUND

 In an affidavit attached to the complaint, Federal Bureau of Investigation (FBI) special agent Lon Christensen explains why speculators are interested in obtaining stock during the initial offering. If eligible depositors exercise their subscription rights to the extent that all stock is purchased, the general public cannot purchase stock in the initial offering and can only purchase stock once public trading in the stock commences. Past conversions have shown that once the stock is traded publicly, the price per share increases significantly shortly thereafter. Thus, a person who is not an eligible depositor in a converting association (a "speculator") has a financial incentive to convince eligible depositors to purchase stock on behalf of the speculator.

 Pursuant to the conversion process, FirstRock offered its available stock for sale until 12:00 p.m. on Thursday, September 24, 1992. The conversion closed on October 2, 1992. At that time, FirstRock issued shares to eligible Association depositors who had submitted stock order forms. The government alleges that included among that group were depositors illegally acting on behalf of speculators engaged in a scheme to obtain FirstRock shares through false and fraudulent representations. A federal criminal investigation was initiated during the final days of the FirstRock conversion and included the use of an undercover FBI agent who posed as an eligible First Federal depositor, "Brian T. Grant."

 122,942 shares (No. 92 C 20288)

 Christensen outlines what the undercover FBI agent discovered when the agent posed as "Grant." On September 23, 1992, "Grant" received a telephone call from a person identifying himself as Jim Shaw. Shaw asked "Grant" if he had a checking or savings account at First Federal. When "Grant" answered affirmatively, Shaw said he would wire money to "Grant's" checking account so that "Grant" could then write a check to First Federal. Shaw told "Grant" he wanted "Grant" to buy $ 200,000 of First Federal stock. Later that same day "Grant" met with Shaw and another person (later identified as Leichter). Shaw, in the presence of Leichter, executed a FirstRock Subscription Offering Stock Order Form. Shaw required "Grant" to sign the form as well as two irrevocable stock power forms and two forms regarding stock certificates registered in names other than that of an account. (See Compl., Exh. C-3, D-1 to D-5). During their conversation, Shaw told "Grant" he would be dealing with Shaw's partner, Brad Frericks, in the future. *fn1"

 Shaw told "Grant" that when "Grant" received the stock, Shaw should get it immediately. When "Grant" asked about the "under penalty of perjury" certification on the stock order form, Shaw told him it was a trick. "Grant" was also told if anyone asked, "Grant" was to say he was purchasing the stock for himself. At the end of the meeting, Shaw, in Leichter's presence, gave "Grant" $ 500 in cash. "Grant" was to receive an additional $ 1,000 when the stock issued. Subsequently, Frericks told "Grant" $ 150,000 would be wired into his account at First Federal. In fact, the government alleges a total of $ 151,500 was wired into "Grant's" account from various sources.

 Shaw admits he and Frericks, operating through SCI, entered written agreements similar to the one described above with four other First Federal depositors: Kevin Drew, Gory Church, Trent Johnson and Ellen Steinhagen. These agreements were entered into and executed between September 17 and September 24, 1992. Under the terms of the agreements, SCI agreed to loan each depositor funds ranging from $ 151,000 to over $ 211,000. The depositors were to use the funds to purchase FirstRock stock in accordance with their subscription rights. Shaw and Frericks have filed verified claims to 101,782 shares of defendant property in 122,942 shares.2

 The government also interviewed Steven Pierce on October 2, 1992, whose former brother-in-law is Leichter. According to Pierce, he and Leichter agreed that Pierce would purchase stock. Because Leichter was providing the money, they "set it up" so that Leichter would be acting as trustee over the stock and Pierce would have the beneficial interest. Pierce thought the transaction would involve 100 to 200 shares. He stated he signed the forms (described above) before they were filled out. When the FBI showed Pierce the stock order form, he noted it was for 20,000 shares for $ 200,000. According to Pierce, that was the first time he saw the completed forms and "in no way" did he have $ 200,000. Leichter has filed a verified claim to 21,160 shares of defendant property in 122,942 shares.

 Zvi Fishbane, Sheila Powsner, Nathen T. Schwitzer, Joel Pogolowitz, Robert S. Rubinstein, Dolores Jugo and Walter Luscy have filed verified claims to defendant property in 122,942 shares. According to their verified claims, each claimant invested a sum of money with Norman Beckoff or Brett Brandes. *fn3" Brandes or Beckoff then invested each claimant's money with Frericks, Shaw and/or SCI, who then allegedly used the funds to Purchase FirstRock stock. Each claimant asserts he or she has a valid interest to the extent of the value of the amount invested in the shares of stock.

 105,800 shares (No. 92 C 20289)

 In 105,800 shares, Christensen recounts a similar scheme between Hamilton Investments, *fn4" Broadmoor Insurance Agency and the following eligible First Federal depositors: Karen M. Naramore, Tamara Stone, Jennifer Streit, and Michelle Teeters. (See Compl., Exh. A, at 8-19). Christensen also recounts that an eligible First Federal depositor, Dennis Bragelman, allegedly obtained funds to purchase FirstRock stock from John (last name unknown), the owner of North Water Produce. *fn5"

  Bragelman has filed a verified claim to 21,160 shares of defendant property in 105,800 shares. Robinson Engineering has also filed a verified claim to 21,160 shares. *fn6" In its verified claim, Robinson Engineering states that it tendered $ 211,600 to Hamilton Investments. Hamilton Investments then used this sum to purchase the shares of stock which are the subject of this forfeiture action. Susan B. Kirschner has also filed a verified claim to 21,160 shares of defendant property in 105,800 shares. In her verified claim, Kirschner states she loaned $ 211,600 to eligible First Federal depositor Karen Naramore on September 24, 1992, and the subject shares were pledged to Kirschner as security for the loan.

 Gus W. Boosalis also filed a verified claim to 42,320 shares of defendant property in 105,800 shares. Boosalis asserts he is owner of these shares but does not state how he acquired this status. However, in his statement of facts filed with his motion for summary judgment, Boosalis elaborates as to how he is the "owner" of 42,320 shares. According to Boosalis, he forwarded $ 421,000 to a Merrill Lynch broker, Paul Savigos (presumedly Paul Svigos), for investment in FirstRock stock through Marty Flanagan III of Hamilton Investments. Flanagan then created a stock pledge transaction between Teeters, Streit and Boosalis.

 49,032 shares (No. 92 C 20290)

 In 49,032 shares, Christensen outlined a similar scheme between Elite and the following eligible First Federal depositors: Timothy Elliott, Roderick Malone, Holly Suddarth and Patrick L. Suddarth. *fn7" Elite has filed a claim for 49,032 shares. In its claim, Elite states the loan agreements and powers of attorney between itself and Elliott, Malone and the Suddarths grants Elite an interest in the stock.

 On October 4, 1992, when the government initiated the present forfeiture actions, it also filed an ex parte motion to request a judicial determination of probable cause based on each complaint and accompanying affidavit. That day, after reviewing each complaint and affidavit, Magistrate Judge P. Michael Mahoney entered a finding of probable cause that the defendant property was subject to forfeiture and ordered the United States Marshal to seize the defendant property and give notice of the seizure. Magistrate Judge Mahoney also ordered FirstRock to halt transfer of the defendant property and deliver the stock certificates to the U.S. Marshal.

 CONTENTIONS

 Various claimants contend the following: (1) FirstRock was not "deceived" within the meaning of the bank fraud statute because of information found on the face of the stock order form; (2) FirstRock was not "deceived" within the meaning of the statute because it had information as a result of its involvement in the government's "sting" investigation; (3) given the nature of volatile publicly-traded security, the seizure of defendant property is not appropriate; (4) with respect to Trent Johnson, the complaint fails to allege any specific facts establishing a pre-conversion illegal agreement; (5) violation of OTS regulation 12 C.F.R. § 563b.3(i) is a prerequisite to a violation of section 1334 and the various agreements executed between claimants and depositors do not violate the OTS regulation; (6) the alleged scheme to defraud did not expose FirstRock to a risk of loss nor otherwise threaten the financial integrity of the institution; (7) the stocks issued by FirstRock were not "owned by or in the custody or control of a financial institution" within the meaning of section 1344; (8) the shares issued to the depositors are not "proceeds" within the meaning of the statute. Several claimants also assert an "innocent owner" defense. See 18 U.S.C. § 981(a)(2).

  The government contends certain claimants lack standing to contest the forfeiture in the instant case. Alternatively, the government asserts it need not prove a violation of section 563b.3(i) of the OTS regulations to prove a violation of section 1344(2). *fn8" The government also asserts it has sufficiently pled bank fraud in violation of section 1344(2) for purposes of a motion to dismiss. Additionally, the government contends Magistrate Judge Mahoney's finding of probable cause is sufficiently supported by the verified complaint and accompanying affidavit. Moreover, the government argues that seizure and forfeiture of the defendant property is statutorily authorized and constitutionally permissible.

 I. Standing

 The government contends the interests of certain parties who have filed motions to dismiss are insufficient as a matter of law to create cognizable claims. The government concludes that in the absence of legally protected interests in the seized shares these claimants lack the standing to contest the present forfeiture actions. Because standing is a threshold issue and fundamental to a court's subject matter jurisdiction, this court will address the standing issue first. See United States v. $ 38,000.00 in United States Currency, 816 F.2d 1538, 1543 (11th Cir. 1987).

 The Seventh Circuit notes there are two forms of standing in a forfeiture case: Article III standing and statutory standing. See United States v. U.S. Currency, in the Amount of $ 103,387.27, 863 F.2d 555, 560 n.10 (7th Cir. 1988). The court disagrees with the government's broad assertion that claimants to property seized pursuant to section 981 must prove they are owners or lienholders to establish Article III standing. *fn9" Rather, to contest a forfeiture, a claimant must first show a sufficient interest in the property to give him Article III standing. In the Amount of $ 103,387.27, 863 F.2d at 560 n.10. A claimant need not prove the merit of his underlying claim but must be able to show "at least a facially colorable interest in the proceedings" sufficient to satisfy Article III. $ 321,470.00, 874 F.2d 298, 302; see also United States v. One 18th Century Colombian Monstrance, 797 F.2d 1370, 1375 (5th Cir. 1986), cert. denied, 481 U.S. 1014, 95 L. Ed. 2d 496, 107 S. Ct. 1889 (1987). Once that hurdle is met, a claimant must satisfy the procedural rules of the Supplemental Rules for Certain Admiralty and Maritime Claims (Admiralty Rules) to establish statutory standing. A claimant bears the burden of establishing standing. United States v. $ 321,470.00, U.S. Currency, 874 F.2d 298, 302 (5th Cir. 1989); United States v. $ 38,000.00 in U.S. Currency, 816 F.2d 1538, 1543 n.11 (11th Cir. 1987).

 At issue in the present dispute is whether certain claimants have Article III standing. The government has brought this action pursuant to the civil forfeiture statute, 18 U.S.C. § 981(a)(1)(c) (West Supp. 1993), which authorizes the United States to subject to forfeiture, "Any property, real or personal, which constitutes or is derived from proceeds traceable to a violation of section 1344 of this title[.]" A claimant in a forfeiture case has Article III standing if "he has a legally cognizable interest in the property that will be injured if the property is forfeited to the government. It is this claim of injury that confers upon the claimant the requisite 'case or controversy' standing to contest the forfeiture." $ 38,000.00 in U.S. Currency, 816 F.2d at 1543-44 n.12. Thus, courts have held that possession of legal title only with no authority to exercise dominion and control over the property does not confer standing to challenge a forfeiture. United States v. One Parcel of Land, Known as Lot 111-B, Tax Map Key 4-4-03-71(4), Waipouli, Kapaa, Hawaii, 902 F.2d 1443, 1444 (9th Cir. 1990); United States v. 526 Liscum Dr., 866 F.2d 213, 217 (6th Cir. 1988). Conversely, a property interest less than ownership, such as a possessory interest, may be sufficient to confer standing. See United States v. Currency $ 267,961.07, 916 F.2d 1104, 1106 (6th Cir. 1990); see also United States v. One Rural Lot, 739 F. Supp. 74, 77 (D.P.R. 1990) ("the term ownership interest has been liberally construed to encompass any person with a recognizable legal or equitable interest in the seized property."). The court must analyze the standing of the following "claimants": Leichter, Shaw, the Fishbane claimants; *fn10" Kirschner; Robinson Engineering; Boosalis; and Elite. *fn11"

 A. Leichter

 On the Subscription Offering Stock Order Form for Steven Pierce, James Leichter is listed as the person in whose name the stock is to be registered. (See 122,942 shares Compl., Exh. C-5). Purportedly, Leichter was acting as Pierce's trustee. The government notes Pierce has failed to file his own claim to the defendant property. The government asserts Leichter has failed to indicate he is filing the claim as trustee for Pierce, has failed to attach the agreement purportedly establishing his role as Pierce's trustee, and has failed to assert the claim is authorized by Pierce. The government also notes Pierce has disavowed the stock order. (See 122,942 shares Compl., at 16-17). The government, in essence, challenges the trustee arrangement. However, this is a factual issue and cannot properly be decided on a motion to dismiss.

 For purposes of a motion to dismiss, all well-pleaded allegations are accepted as true. In the affidavit attached to the complaint, Christensen recounts Pierce's statement regarding the transaction at issue, wherein he describes Leichter as trustee over the stock and Pierce as having the beneficial interest. Additionally, following Leichter's name on Pierce's stock order form is the acronym, "TTEE." Thus, the pleadings sufficiently reflect a trust establishing Leichter as trustee for Pierce for purposes of this motion and it is irrelevant, for purposes of a motion to dismiss, that Leichter has failed to attach a copy of the trust agreement. *fn12"

 It is basic to the law of trusts that a trustee may represent a beneficiary in all actions relating to the trust when the beneficiary's rights as against the trustee or the rights between beneficiaries are called into question. See United States v. 120 Beacon St., No. 85-2787-2, 1987 U.S. Dist. LEXIS 10661, 1987 WL 20225, at *1 (D. Mass. Nov. 6, 1987). Unproven allegations of a "sham" trust do not eviscerate Leichter's standing based on his status as record owner of the stock as Pierce's trustee. 120 Beacon St., No. 86-2787-2, 1987 U.S. Dist. LEXIS 10661, 1987 WL 20225, at *1.

 B. Shaw

 The government argues the option agreements do not confer standing on Shaw. This is so, the government argues, because any interest SCI may have had in the shares before exercising its options is a mere expectation. The government concludes that a future expectation of ownership is insufficient to confer standing on a claimant and relies on United States v. R.R.2, 790 F. Supp. 200, 202 (N.D. Iowa 1991), aff'd, 959 F.2d 101 (8th Cir. 1992). Shaw argues it is the very existence of the written agreements between SCI and each depositor which gave rise, in part, to the instant forfeiture. While these agreements merely granted SCI an option to purchase the stock, Shaw argues that this expectation, when coupled with the funds SCI loaned to each depositor, confers Article III standing on Shaw.

 The court agrees with Shaw. The written agreements and the exchange of money between SCI and the depositors lies at the heart of the government's claimed violation of section 1344. *fn13" The court finds R.R. 2, which involved a child's future ownership expectation, inapposite. The nature of the statute at issue coupled with the extent of Shaw's involvement in the alleged scheme which gave rise to the present forfeiture dispute indicates Shaw has a ...


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